# SECURITIES AND EXCHANGE COMMISSION > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3A0eae876c68d27605 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 DIVISION OF INVESTMENT MANAGEMENT April 5, 2013 Mr. Philippe M. Salomon Blank Rome LLP 405 Lexington A venue New York, NY 10174-0208 Dear Mr. Salomon: In your letter, dated March 28, 2012, you request assurance that we would not recommend enforcement action to the Securities and Exchange Commission ("Commission") under Rule 22c-1 under the Investment Company Act of 1940 ("Act") or Regulation S-X against Copley Fund, Inc. ("Copley"), a Nevada corporation registered under the Act as an open-end management investment company, which has elected to operate as a C Corporation under the Internal Revenue Code ("Code"), if Copley calculates its deferred Federal tax liability for unrealized gains based on a management-developed estimate that is a pre-set fonnula. For the reasons explained below, we are unable to provide such assurance. Background Rule 22c-1 under the Act states, in relevant part, that no registered investment company issuing any redeemable security shall sell, redeem, or repurchase any such security except at a price based on the current net asset value ("NA V") of such security which is next computed after receipt of a tender of such security for redemption. Rule 2a-4(a)(4) under the Act provides, in relevant part, that in computing the NAV of any redeemable security, "[a]ppropriate provision shall be made for Federal income taxes if required" by the registered investment company.' Copley is offering for sale and has outstanding redeemable securities that are subject to Rules 2a­ 4 and 22c-1. 1 From 1970 until1982, Rule 2a-4(a)(4) specifically required provision for Federal income taxes in accordance with Regulation S-X. In 1982, the Commission removed the specific reference, a change made to confonn with amendments to Article 6 of Regulation S-X that were adopted at the same time, and not as a substantive change to Rule 2a-4(a)(4). Financial Statement Requirements for Registered Investment Companies, Investment Company Act Release No. 12871 (Dec. 6, 1982). As an investment company registered under the Act, Copley is subject to Regulation S-X, including Rule 4-0l(a)(l) of Regulation S-X, which states, in relevant part, that "[f]inancial statements filed with the Commission which are not prepared in accordance with generally accepted accounting principles [("GAAP")] will be presumed to be misleading or inaccurate, despite footnote or other disclosures, unless the Commission has otherwise provided." As a C Corporation under the Code, Copley must account for income taxes in accordance with the Financial Accounting Standards Board's ("FASB's") Accounting Standards Codification Topic 740, Income Taxes ("ASC 740"). ASC 740 indicates that financial statements should reflect the amount of deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns? There is also an assumption that all assets and liabilities of an entity will be recovered and settled, which may result in temporary differences. 3 ASC 740 also provides several examples of items that result in differences between the recognition oftransactions or events for financial reporting purposes and tax purposes. Revenues or gains that are taxable after they are recognized in financial income are included as an example of a temporary difference. 4 Unrealized gains on investments, which are taxable after they are recognized in the financial statements, represent a temporary difference on which a deferred tax liability must be recognized. The recognized deferred tax liability is calculated by multiplying the temporary difference (i .e. , the unrealized gains) by the expected tax rate at the expected time ofreversal. 5 Copley' s proposal to calculate the deferred tax liability based on a management-developed estimate that is a pre-set formula would not comply with GAAP as it would result in Copley recognizing only a portion of the deferred tax liability required by ASC 740 . Conclusion We do not believe that Copley can comply with GAAP or with Rule 4-0l(a)(l) of RegulationS­ X without complying with ASC 740 . We also do not believe that Copley has demonstrated that, for purposes of Rule 2a-4(a)(4) under the Act, an appropriate provision for Federal income taxes should be made in any manner other than one that is consistent with GAAP . Therefore,,we are unable to assure you that we would not recommend enforcement action to the Commission against Copley under Rule 22c-1 or Regulation S-X if Copley does not comply with ASC 740. 2 FASB ASC 740-10 -10-1(b) . 3 See FASB ASC 740-10-25-20. 4 FASB ASC 740-10-25 -20(a). 5 Se e generally FASB ASC 740-10-10-3 (indicating that the objective is to measure a deferred tax liability using the enacted tax rate expected to apply to taxable income in the periods in which the deferred tax liability is expected to be settled). If you have any further questions related to this matter, please contact Megan Monroe in the Division of Investment Management at 202-551-6950. Sincerely, Douglas Scheidt Associate Director and Chief Counsel Division of Investment Management fJ~{;v~ Jaime Eichen Chief Accountant Division of Investment Management BLANK ROME LLP COUNSELORS AT LAW Phone: (212) 885-5455 Fax: (212) 885-5002 Email: psalomon@blankrome. com March 28, 2012 Office of Chief Accountant Division of Investment Management U.S. Securities and Exchange Commission 100 F. Street, N .E., Mail Stop 4 720 Washington, D.C. 20549-4720 Attn: Jaime Eichen Re: Copley Fund, Inc.: Request for Interpretive Opinion and No Action Assurance; Rule 22c-1 promulgated under the Investment Company Act of 1940 and Rule 4-0l(a)(l) of Regulation S-X Dear Ms. Eichen: This Firm represents Copley Fund, Inc. ("Copley" or the "Fund") and on its behalf, submits this letter as a continuation of Copley's prior communication, through counsel, to the Division oflnvestment Management (the "Division") on September 28, 2011 (the "September 28 Letter," annexed hereto as Exhibit A). Copley is hereby requesting a written opinion from the Division permitting the Fund to alter the manner in which it has accounted for deferred tax liability for unrealized gains since 2007. More specifically, Copley proposes to account for its deferred tax liability for unrealized gains by establishing a tax reserve based on a pre-set formula more fully set forth below at pages 11 through 14. Further, it seeks assurances that the Division will not recommend that the Commission commence an enforcement action against Copley should it follow this proposed approach. While Copley has submitted various proposals to the Division regarding how the Fund could more fairly, reasonably and accurately account for its deferred tax liability for unrealized gains, including the September 28 Letter, to date, the Commission has failed to provide a final determination. In the September 28 Letter, Copley sought no-action assurances from the Division if the Fund were to (i) prepare and issue financial statements using a reserve for taxes on unrealized gains based on management's estimates, rather than on the assumption that all assets with unrealized appreciation would be sold at current prices and/or (ii) issue and redeem shares based on current net asset value as so determined, with an explanation of the calculation and a comparison ofthe difference between such calculation of net asset value with a reserve for taxes on all unrealized appreciation. After the submission of that letter, Copley had detailed The Chrysler Building 405 Lexington Avenue New York, NY 10174-0208 www.BiankRome.com Delaware • Florida • New Jersey • New York • Ohio • Pennsylvania • Washington, DC • Hong Kong Jaime Eichen Chief Accountant, Division of Investment Management March 28, 2012 Page2 discussions of the issues with numerous representatives from the Staff on a conference call in the Fall of2011. Thereafter, Copley had expected to receive a written response from the Staff, but has not received any to date. Requiring Copley to set a tax reserve for unrealized gains on the assumption of full liquidation is inconsistent with Copley's investment philosophy of reinvesting dividends and accumulating capital gains and misleading because it substantially understates the Fund's invested assets and net asset value ("NA V"), while overstating its operating expenses. See infra, at 7. To address these circumstances, Copley does not now simply seek approval for the discretion by its management to establish an appropriate reserve. Rather, as discussed more fully below at pages 11 through 12, Copley presents two alternatively defined formulas for calculating the reserve and allowing pre-set means to sell securities in its portfolio to satisfy extraordinary redemptions if necessary. Finally, Copley is prepared to convert to a Regulated Investment Company ("RIC") by a pre-arranged commitment, essentially triggered by the unforeseen event of unusually high redemptions. Accordingly, Copley respectfully requests that a final written opinion or order be issued granting the relief requested. In support, Copley offers this summary of the prior dialogue the Fund has had with the SEC on this issue, incorporates by reference the arguments made in its prior submissions annexed hereto, and submits a new proposal for the Division's consideration, which the Fund believes would result in a fairer and more accurate disclosure of its current and ongoing financial operations. A. Procedural History of this Matter Since 1992, Copley has maintained that the accrual for unrealized capital gains taxes is best represented by a "reserve" established by its Board, rather than the use of a full liquidation value accrual to calculate the Fund's NAV. Until2007, the SEC had never required that Copley change this methodology. It is this structure for which the Fund now seeks no-action relief. In August of2007, the Stafftook issue with Copley's accounting for, and disclosure of, tax reserves for unrealized appreciation in its financial statements filed for the year ended February 28, 2007. In a comment letter dated September 26, 2007 (the "Comment Letter"), the Staff asserted that Copley had failed to account properly for deferred tax liabilities and assets for the future tax consequences of events recognized in its financial statements, as required by FAS 109 and in violation ofRule 4-01(a)(l) of Regulation S-X, which provides that "financial statements filed with the Commission which are not prepared in accordance with generally Jaime Eichen Chief Accountant, Division of Investment Management March 28, 2012 Page 3 accepted accounting principles will be presumed to be misleading or inaccurate, despite footnote of other disclosures, unless the Commission has otherwise provided." (A copy of the Comment Letter is annexed hereto as Exhibit B.) It is not clear from the Staffs correspondence what caused it to change its view in 2007 and suddenly to require Copley to change its methodology. In the Comment Letter, the Staff noted that Copley has elected to operate as a subchapter C Corporation, and not a RIC, and that it was unaware of any other investment company that chose not to qualify as a RIC that did not accrue a deferred tax liability associated with its unrealized appreciation. (Ex. Bat 3-4.) The Staff explicitly acknowledged Copley's willingness to convert to RIC status in the event unforeseen circumstances caused gains to be realized that consumed the entire amount of accumulated deferred income taxes that Copley had recognized. (ld. at 5-6.) It did not, however, address- and, to date, still has not addressed -whether conversion would satisfy the SEC's concerns regarding the Fund's tax accounting. By letter dated November 30, 2007, the Division of Enforcement's Boston Regional Office expressed to Copley its intent to seek immediate injunctive relief against the Fund if it did not adjust its per share NAV to account for the full liquidation liability for tax on unrealized capital gains. (A copy of the November 30, 2007 Letter is annexed hereto as Exhibit C.) To avoid such injunctive litigation with the Commission, Copley's Board approved shortly thereafter an adjustment of the Fund's NAV using the SEC's preferred full liquidation value methodology. On March 21, 2008; the Division of Enforcement informed Copley that it was conducting an informal investigation of the Fund into possible violations of the securities laws, and requested that the Fund provide certain information on a voluntary basis. The Commission apparently later converted the proceeding into a formal investigation against Copley a11d its CEO Irving Levine for potential violations of certain antifraud provisions, namely, Section 34(b) of the Investment Company Act of 1940 (the "ICA"), Rule 22c-1(a), promulgated under Section 22( c) thereunder, Section 17(a) of the Securities Act, and Section 1O(b) of the Exchange Act and Rule 1Ob-5 promulgated thereunder; as well as a books and records violation under Section 204 1 of the Investment Advisors Act of 1940 and Rule 204-2 promulgated thereunder. Copley fully cooperated with the investigation. 1 The SEC's request for information and its Formal Order of investigation are not being annexed hereto because they are non-public documents. Copley presumes that the Division has access to those records. Jaime Eichen Chief Accountant, Division of Investment Management March 28, 2012 · Page4 On July 18, 2008, Copley was required to restate its historical financial statements to account for the full liquidation value methodology required by the SEC and filed an amended Form N-CSR/A containing a Restated Annual Report to its shareholders. (A copy of that filing is annexed hereto as Exhibit D.) On or about November 19, 2008, in an effort to resolve the investigation, Thomas Henry, Esq., Copley's counsel, sent a letter to James S. Goldman, Esq., of the SEC's Boston Regional Office, enclosing a memorandum that described in detail the negative impact of the change 'in methodology and the reasons Copley's original reserve methodology was in the best interests of the shareholders (the "November 2008 Memo"). (A copy ofthe November 19, 2008 letter, with its enclosures, is annexed hereto as Exhibit E.) Among other things, the letter explained that Copley's change in methodology to a full liquidation value accrual'in calculating the Fund's per share NAV had resulted in misleading and inconsistent financial statements that did not reflect the fair or accurate value ofthe Fund's shares. The letter also enclosed a proposed Prospectus Supplement that would provide disclosures to the shareholders necessary for their consideration of the risks associated with this methodology. We understand that correspondence was shared with the Division. Copley has not received a substantive response to the November 19, 2008 letter to Mr. Goldman. In February of2009, Copley was informed by Mr. Goldman that the investigation of the Fund had been reassigned to Lawrence Pisto, Esq., also of the Boston Regional Office. Thereafter, the Staff took testimony of, among others, Irving Levine and Copley's outside accountant, Roy Hale. On October 5, 2009, Mr. Henry sent a letter to Mr. Pisto to follow up on a prior telephone conversation to inquire about the status of the investigation. With that letter, Mr. Henry re­ submitted the November 2008 Memo and proposed Prospectus Supplement. (A copy of Mr. Henry's October 5, 2009 letter, with its enclosures, is annexed hereto as Exhibit F.) As detailed therein, Mr. Henry argued that a certain degree of flexibility is appropriate under GAAP and FAS accounting standards and under the SEC rules, and that such flexibility was warranted here. Further, Mr. Henry reiterated Copley's willingness to provide transparent disclosures to its investors and requested a meeting with the Staff. Our understanding is that the requested meeting did not take place. Instead, in a December 2, 2009 letter, the Division responded to Mr. Henry's October 5 letter and asserted that Copley had provided neither any new arguments not previously considered by the Staff, nor any "changes in the Company's circumstances that might cause reconsideration of [the Staffs] Jaime Eichen Chief Accountant, Division of Investment Management March 28, 2012 Page 5 original position." (A copy of the December 2, 2009 letter is annexed hereto as Exhibit G.) In that letter, the Division informed Copley that it would again recommend immediate enforcement action if Copley were to submit financial statements that did not comply with ASC 740 (which codified FAS 109) by using the methodology required by the Staff. On March 5, 2010, Kevin Kelcourse, Esq., Assistant Regional Director from the Boston Regional Office, informed Mr. Henry by letter that the investigation of Copley and Mr. Levine was officially completed and that the Staff would not recommend enforcement action. Thus, the investigation closed without any penalties. Nonetheless, Mr. Kelcourse's letter reiterated that if Copley did not comply with the requirements ofFAS 109 and/or re-codified ASC 740, the Division of Enforcement would recommend enforcement action by the Commission. (See Exhibit H.) Following the closing of the investigation, Copley and its counsel engaged in further communications with the Staff in an effort to reach a mutually acceptable resolution ofthis issue. For example, on July 15,2010, Mr. Henry exchanged e-mails with Kevin Rupert ofthe Division's Staff concerning proposed modifications to Copley's financial statements. In that exchange, Mr. Rupert acknowledged the unique structure of the Fund, stating that, "While we have been firm on not permitting footnotes, this fund has really unusual tax issues, and for this reason an explanatory footnote might be permitted- but I make no promises." (Exhibit I (emphasis added).) 2 Finally, on September 28, 2011, Copley, through its counsel, David Faust, Esq., sent the Division the request for no-action assurance referenced earlier. The September 28 Letter explained in detail why the use of the Staffs full liquidation value methodology is inappropriate given the unique nature of the Fund, is inconsistent with its investment philosophy, policy and practice, has led to misleading financial statements and reporting that understates the amount of assets under management and does not represent the true value ofthe Fund's shares. (See Ex. A.) Moreover, Mr. Faust explained that the Commission's refusal since 2007 to permit Copley's management to exercise any discretion with respect to deferred tax accounting differed from its treatment of Weyerhaeuser Corporation, which apparently had been permitted to depart from a literal reading of a required tax accounting provision. Indeed, as more fully explained below, the Commission's position with respect to Weyerhaeuser and other similarly situated companies contradicts its position with respect to Copley. 2 The Staff apparently did deviate from its normal practice of not permitting footnotes, as Copley's semi-annual shareholder report for the period ended August 31, 2010, includes footnotes to its financial statements clarifying the nature of the deferred tax liability. (See Ex. J.) Jaime Eichen Chief Accountant, Division of Investment Management March 28,2012 Page 6 B. Summary of Copley's Arguments Copley believes it would be useful to summarize briefly the arguments the Fund has previously presented to the Staff and which it believes continue to support its position. 1. The Fund is unique. Copley is a C Corporation, and not a RIC. Although the Fund has some of the characteristics of a RIC, unlike one, up to 70% of the dividend income received, or 70% of the taxable income of the Fund, whichever is less, is exempt from federal taxation under the Internal Revenue Code. The remaining 30% of the Fund's income is taxable. Unlike most funds, the taxable income generated by the Fund is not passed on to the shareholders. Furthermore, contrary to most other funds, Copley has maintained a strategy of not distributing dividends and capital gains to shareholders, but rather, accumulating them within the Fund and then adding them to the value of each share on a daily basis. Shareholders, therefore, are able to defer dividend and capital gains taxes until redemption. To the knowledge of Copley's management, it is the only U.S. open-end mutual fund that operates in this manner. The Division has, in fact, acknowledged the unique tax structure of the Fund. (See supra at 5 and Ex. Il As a result of this method of operation, the risk of Copley incurring a tax liability in excess of the reserve established by the Board is exceedingly remote. Concomitantly, a strict application ofFAS 109 to require a full liquidation value deferred tax liability affects the Fund disproportionately because, unlike a typical C Corporation whose shares are valued by the market, Copley is required to calculate its price daily with respect to its redeemable shares. Thus, the Division's methodology puts Copley at a decisive disadvantage relative to its peer funds because it artificially deflates the Fund's NAV and thereby unfairly makes it appear to the investing public to be a less attractive investment opportunity compared to its competitor funds. 3 Although in its 2007 Comment Letter (see Ex. B), the Staff referred to two other investment companies that have not elected RIC status but record a deferred tax liability, Tortoise Energy Capital Corp. and Kayne Anderson MLP Investment Company, as Copley explained in the November 2008 Memo, both are easily distinguishable from Copley because, among other things, they are closed-end funds. (See November 2008 Memo at Ex. E, p. 11, n. 4.) Jaime Eichen Chief Accountant, Division of Investment Management March 28, 2012 Page 7 2. The Staffs mandated methodology leads to misleading financial accounting. Beginning in 1992, Copley implemented a policy of regularly monitoring the Fund's potential income tax liability on unrealized gains and accruing a reserve that corresponded with the anticipated actual liability. The estimate ofthe Fund's future liability was based on factors that included anticipated redemptions beyond the ability of the Fund to cover, the Fund's investment strategy and track record of holding dividend paying stocks for the long term, and the fact that the entire deferred liability would be due only in the unlikely event the entire portfolio were liquidated. (See November 2008 Memo, at Ex. E, for a more detailed explanation of the reserve methodology.) During the entire period in which the Board employed this methodology, the reserve was never used. (See November 2008 Memo at 5.) The Fund's use of the Staffs mandated methodology, under which it records the entire deferred tax liability, has led to a materially misleading reported NAV since 2007. This result derives from the facts that it (i) does not accurately reflect Copley's investment policy and practice of long-term holdings of its positions; (ii) understates the amount of invested assets actually under management on which gains or losses are actually realized; and (iii) overstates the Fund's operating expense ratio (by including as expenses deferred taxes, which are not actual or realized operating expenses). (See Ex. A at 2-4.) Copley submits that it is in the best interests of the Fund's shareholders to reserve for deferred tax liability in a manner that allows the per share NAV to reflect better the true value of the Fund's shares. As Copley has always assured the Staff, if permitted to do so, it will provide full transparency to investors by, for example, including in its prospectus a clear explanation of the differing effects in pricing, as calculated using the reserve method and the full liquidation value methods. (See, e.g., Ex. E; Ex. F.) Copley recognizes that the SEC may be reluctant to permit its management unfettered discretion to calculate the appropriate reserve and that it may have concerns that Copley, through its prior methodology, may have overstated the value of its shares. Without conceding the validity of those concerns, the Fund is prepared to address this issue and to propose an acceptable resolution. Accordingly, in Section C, below, Copley sets forth a new methodology, whereby the Fund will calculate the reserve using a pre-set formula that it believes will be acceptable to the Commission and should allay any of its concerns. Jaime Eichen Chief Accountant, Division of Investment Management March 28, 2012 Page 8 3. Copley is willing to convert to a RIC. As explained in more detail in the memorandum initially provided to the Staff in November of2008, Copley has advised the Staff of its willingness to convert to RIC status in the event unforeseen circumstances caused gains to be realized that consumed the entire amount of accumulated deferred income taxes it has recognized. (See Ex. B at 5-6; November 2008 Memo at Ex. E, pp. 6-8.) As discussed more fully, infra, at 14, conversion to a RIC would be analogous to the restructure and tax treatment sanctioned by the SEC with respect to other entities. 4. Copley's "reserve" methodology is consistent with the ICA Rules. Rule 22c-1 promulgated under the ICA requires open-end funds to issue and redeem shares "at a price based on the current net asset value of such security ...." In turn, the rules define "current net asset value" as the "amount which reflects calculations, whether or not recorded in the books of account, made substantially in accordance with the following, with estimates used where necessary or appropriate." ICA Rule 2a-4 (emphasis added). As set forth in more detail in the September 28 Letter, these rules, when read together, do not require the price of the Fund's shares to be exactly the same as its NAV. (Ex. A at 2.) Copley's issuance and redemption of shares based on aNAV that reflects a management determined tax reserve, therefore, does not violate the ICA Rules. 5. Copley's "reserve" methodology is permissible under GAAP. The Staff has argued that a management established reserve, rather than a deferred tax liability reflecting the full liquidation, would violate GAAP, and specifically FAS 109 and re­ codified ASC 740. The reserve methodology, however, is actually more consistent with the assumptions, constraints and conventions underlying GAAP than the full liquidation value methodology. For example, under GAAP, there is an assumption that a business will continue to operate as a going concern. (See, e.g., Accounting Research Bulletin 43, Chapter 3: Working Capital, Section A, stating "It should be emphasized that financial statements of a going concern are prepared on the assumption that the company will continue in business."). The Staffs liquidation value method, by contrast, assumes the Fund will close, be sold or entirely liquidated en masse. The use ofthe liquidation value method also contradicts the principles of realization/revenue recognition and matching by effectively transforming a contingent liability into a full, current, realized liability and failing to match current revenue and assets with correct, actual liabilities. Lastly, the use of the liquidation value method is contrary to the principle of adequate disclosure underlying GAAP, in that it presents financial statements that are effectively Jaime Eichen Chief Accountant, Division of Investment Management March 28, 2012 Page 9 misleading because they do not accurately convey the true value of Copley's shares. (See November 2008 Memo, at Ex. E,_p. 10.) Even assuming, arguendo, that the Fund's proposed reserve methodology would depart from ASC 740, GAAP does allow for certain flexibility where, for instance, the strict adherence to GAAP appears unreasonable under the circumstances and/or would produce unreasonable results. The Commission has appropriately recognized this concept. (See November 2008 Memo at Ex. E, p. 11, n.5, citing the Commission's issuance of rules even for the use ofnon­ GAAP financials, Release No. 33-8176, 34-17226 (January 22, 2003).) Further, as discussed in Copley's October 5, 2009 letter to Mr. Pisto (Ex. F), the Commission submitted to Congress in 2008 a report on mark to market accounting in which it presented recommendations that suggested the appropriateness of discretion and flexibility, including the application of "judgment" in making market price decisions. Here, the use of the full liquidation value method has produced a skewed and unreasonable result- Copley's per share NAV does not reflect the realistic value of the Fund - and, therefore, such flexibility is warranted. 6. The Commission has permitted management discretion with respect to GAAP and tax accounting provisions. We understand from prior correspondence that the Staff apparently has adopted the position that ASC 740 does not allow for any discretion or flexibility with respect to accounting for deferred tax liability. There is, however, evidence to the contrary, as the SEC has permitted certain flexibility to depart from a strict interpretation of GAAP or other tax accounting provisions where doing so would lead to more accurate reporting. First, we are aware of at least two entities- Weyerhaeuser and American Tower Corp.­ that recently converted from C Corporations into real estate investment trusts ("REITs") and, in doing so, have exercised discretion with respect to accounting for deferred tax liabilities. Upon conversion to REIT status, those entities would be subject to a tax on any "built-in gains" that had accrued as of the conversion date if they recognized gains on the disposition of any assets owned at the time of the conversion during the 10-year period following the conversion. Nonetheless, both Weyerhaeuser and American Tower have not accounted for deferred tax liabilities associated with such "built-in gains"- presumably concluding that their likelihood of disposing of such assets within the 10-year recognition period is exceedingly remote. (See also discussion of Weyerhaeuser in the September 28 Letter at Ex. A, pp. 7-8.) Jaime Eichen Chief Accountant, Division of Investment Management March 28, 2012 Page 10 To our knowledge, the SEC has not challenged the approaches of either Weyerhaeuser or American Tower. Notably, the conversions to REITs by Weyerhaeuser and American Tower took place in 2010 and 2012, respectively- years after the Commission mandated that Copley not exercise any management discretion with respect to its deferred tax liability accounting. Although the Fund's situation is not entirely equivalent to that of Weyerhaeuser and American Tower, it is sufficiently analogous because like those entities, Copley is seeking to exercise discretion not to account for the full amount of liabilities that are contingent and exceedingly remote. Copley does not understand the SEC's justification for prohibiting it from exercising similar management discretion, but later permitting· Weyerhaeuser and American Tower to do so. Put differently, Copley submits that the SEC's interpretation of ASC 740 as applied to the Fund is fundamentally inconsistent with the deferred tax liability accounting of these two REITs. Second, in at least one instance, the SEC has granted no-action relief permitting an investment company to present its financial statements in a manner that would have been prohibited under a strict interpretation of GAAP. In April of 2008, the Division assured Fidelity Investments that it would not recommend enforcement action against a Fidelity registered investment company called the Gold Portfolio if it consolidated its financial statements with those of its subsidiary, Fidelity Select Gold Cayman Ltd. See Response of the Office of Chief Accountant of the Division oflnvestment Management to Fidelity Investments, 2008 SEC No­ Act. LEXIS 459 (Apr. 29, 2008). Under a technical reading of the ICA, the subsidiary might not have been considered an investment company because it was only invested in commodities, which are not considered "securities." !d. at * 10. Therefore, the Gold Portfolio technically was not permitted to consolidate its financial statements with the subsidiary, pursuant to GAAP and Rule 6-03(c)(l) of Regulation S-X, which preclude consolidation by a registered investment company with an entity that is not an investment company. !d. at *4-*5. The Division, however, accepted Fidelity's argument that notwithstanding those regulations, it would be appropriate to consolidate the financial statements of the subsidiary into the Gold Portfolio because it would give shareholders a "more accurate picture" of the portfolio and its structure. Specifically, the subsidiary was authorized to invest in securities, would operate as an investment company for all relevant purposes, and was established to act as an investment vehicle for the Gold Portfolio. !d. at *5, * 15. Copley, likewise, should be permitted flexibility to depart from a strict interpretation of GAAP by formulating a reserve for deferred tax liability that leads to a per share NAV that better, and more accurately, reflects the true value ofthe Fund's shares to the investing public. Jaime Eichen Chief Accountant, Division of Investment Management March 28, 2012 Page 11 For all of the reasons summarized here (and others more fully articulated in the attached Exhibits) Copley requests that the Division accept the Fund's proposal regarding its accounting for its deferred tax liability for unrealized gains and issue a final order granting such relief. C. Copley's New Proposal In addition to the arguments which Copley has previously advocated, Copley now submits the following two new proposals that, given Copley's circumstances, would result in a fairer and more accurate disclosure to the investing public, together with a more equitable outcome. 1. Reserve Formula The Fund proposes to accrue a deferred tax liability that fairly and accurately reflects a realistic tax liability, and which addresses the issues regarding the ability to meet redemptions at aNAV that does not include a tax reserve that assunies full liquidation. Accordingly, the Fund proposes to accrue a defined tax liability using one of the following two formulas, each of which is fully transparent. (a) Alternative 1 • At the end of each calendar quarter, the Fund will calculate its average historical turnover rate over the previous five, or even ten, years. In calculating its NAV on a daily basis, Copley will use a tax reserve calculated at a tax rate equal to a percentage of the statutory corporate tax rate determined at four times the average historical turnover rate. The historic, average five-year turnover rate of the Fund for the period from February 29, 2008 through February 29, 2012 was 2.31 %; the average ten-year turnover rate is 2.28%. (See Portfolio Turnover Rate chart annexed hereto as Exhibit K.) Thus, for example, if the unrealized gain at the close of business is $50,000,000, the deferred tax liability under the full liquidation value approach would be $17,500,000. Under either the historical, five-year rate of 2.31% or the historical ten-year rate of 2.28% (both rounded to 2.5%), Copley would set a reserve at four times that 2.5%, or 10%, of the $17,500,000, i.e., $1,750,000. Based on these actual average historical rates, Copley respectfully submits that any multiple of four times allows for a reasonable and adequate tax reserve. Jaime Eichen Chief Accountant, Division of Investment Management March 28,2012 Page 12 • This formula obviously would be independent of any unfettered discretion of the Fund's management. Rather, it would reflect, in a most conservative manner, the average historical turnover rate of the Fund and, therefore, the lack of need for­ or propriety of- a "full" or "liquidation based" tax reserve. • Under this scenario, the Fund would ensure that even if it receives requests on any given day which would require sales of investment assets at a rate four times in excess of its historical rates - a high number based on a 20-year historical track record - it will be able to accommodate such requests. (b) Alternative 2 • At the end of each trading day, the Fund will determine the highest daily redemption of its shares (as a percentage of shares outstanding) during the previous five years. In calculating its NAV on a daily basis, Copley will use a tax reserve calculated at a tax rate equal to a percentage of the statutory corporate tax rate determined at four times the highest daily redemptive rate. For example, if the unrealized gain at the close of business is $50,000,000, the deferred tax liability under the full liquidation value approach would be $17,500,000. If the historically highest daily redemptive rate of the Fund were 2%, Copley would set a reserve at four times that 2%, or 8%, of the $17,500,000, i.e., $1,400,000. This formula, likewise, would be totally independent of the unfettered discretion of the Fund's management. It would reflect, in a most conservative manner, the historically low redemptive rate of the Fund and, therefore, the lack of need for­ or propriety of- a "full" or "liquidation based" tax reserve. • To put this alternative into perspective, the highest daily redemption in the history of the Fund since inception was $1,000,000, which represented approximately 23,260 shares or approximately 1.6% of the total outstanding shares on the date of redemption. The redemptions were effected with no problem. • Under this scenario as well, the Fund would insure that even if it receives redemption requests on any given day that are four times greater than its historically highest redemption- an inconceivably high number based on a 20­ year historical track record- it will be able to accommodate such redemptions. Jaime Eichen Chief Accountant, Division of Investment Management March 28, 2012 Page 13 Either alternative will assure investors in the Fund the ability to redeem their shares at the stated, accurate NAV, thus addressing any concerns that the SEC may have previously harbored. (c) Further Safety Valve In any event, under Section 22(e) of the ICA, the Fund need not redeem all such shares on the day such requests are received, but instead has seven days to redeem them. The Fund has never failed to redeem on the day requests are made. Although the Fund expects to continue to honor all redemption requests on the day requested, it notes that Section 22(e) provides an additional safety valve. Copley does not believe it is a cogent objection to its proposal to say that if more than 8% ofthe shares are redeemed on one day, then the NAV will somehow be overstated due to an insufficient deferred tax liability. In such case, the Fund would seek relief from the Staff and/or could postpone some redemptions to the next day, or for several more days, or for an appropriately longer period, in which case the NAVon those later days would be adjusted to reflect any updated deferred tax liability. Again, the Fund would be following traditional and accepted industry practice, since hundreds or thousands of funds would in fact defer some redemptions if these requests reached 8%. If they did not, they would have to dispose of assets at a material discount, resulting in an apparently overstated NA V. As discussed above, a fund is presumed under GAAP to be a going concern that will continue in business. (See ARB 43.) In other words, the regulatory framework of the fund industry, which promises investors liquidity at a stated NA V, is founded on the premise that there will be an orderly process for large redemptions all at once. For example, if all the investors in Vanguard's S&P 500 Index requested redemptions at the same time, they would, even with a wait of seven days, receive a fraction of their expected NA V, if a distressed liquidation were mandated. Of course, either Van guard W UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C.20549 OIYIIIONO,. September 26, 2007 Irving Levine President Copley Fund, Inc. 245 Sunrise Avenue Palm Beach, Florida 33480 Re: Copley Fund, Inc. (the "Company") Rle Numbers: 2-60951 and 811-2815 Dear Mr. levine: •• We are sending this letter to you as a follow-up to our teleconference with Thomas Henry and Roy Hale held on August 16, 2007. We have comments and questions with respect to the Company's financial statements for the year ended February 28, 2007 ("2007 FS") filed In a Form N-CSR on May·9, 2007. Mr. Hale, the Company's independent accountant audited the 2007 FS and Mr. Henry serves as the Company's counsel. The Company has not elected to operate as a regulated Investment company ("RIC") under subchapter M of the Internal Revenue Code. Thus, the Company Is taxed as a subchapter c Corporation. Our concerns primarily relate to the Company's accounting and reporting of the effects of Income taxes. While It appears that the Company has recorded Its portfolio securities at market prices In accordance with Section 2(a)(41} of the Investment Company Act of 1940 ("1940 Act'1, resulting In $53,994,093 of unrealized appreciation, we believe it has failed to measure and disclose the future tax consequences related to this appreciation, In accordance with accounting principles generally accepted in the United States of America ("GAAP"}. ;t, Accounting and RePorting for Income Taxes in Accordance with GMP •• The Financial Accounting Standards Board's {"FASB'f) sta~ement of Financial Accounting Standards No. 109, Accounting For Income t7xes ("FAS 109'') establishes the financial accounting and reporting standards for the effects of income taxes that result from an enterprise's activities during the current and preceding years. Paragraph 6 of FAS 109 states that t.~e objectives of accounting for Income taxes are to recognize (a) the amount of taxes payable or refundable for the current year and (b) deferred tax llabllltles and assets for the future tax consequences of events that have been recognized In an enterprise's financial statements or tax returns. • Paragraph 11 of FAS 109 sets forth a key concept underlying the recognition of deferred tax assets and liabilities. Paragraph 11 provides that: An assumption Inherent In an enterprise's statement of financial position prepared in accordance with generally accepted accounting principles js that the reported amounts of assets and liabilities will be recovered and settled. respectively. Based on that assumption, a difference between the tax basis of an asset or a liability and Its reported amount In the statement of financial position will result In taxable or deductible amounts In some future year(s) when the reported amounts of assets are recovered and the reported amounts of liabilities are settled. (Emphasis added.) · Paragraph 11 also provides several examples of Items that result In differences between the recognition of transactions or events for financial reporting purposes and for tax purposes. Revenues or gains that are taxable after they are recognized In financial Income are Included as an example of this difference. In Paragraph 11(a). The FASB considered whether the deferred tax consequences of taxable temporary differences truly represent a liability for fl'nanclal reporting purposes. The FASB concluded that the deferred tax consequences do represent liabilities. Paragraph 78 of FAS 109 states: • An enterprise might be able to delay the future reversal of taxable temporary differences by delaying the events that give rise to those reversals, for example, by delaying the recovery of related assets or the settlement of related liabilities. A contention that those temporary differences will never result In taxable amounts, however, would contradict the accounting assumption inherent In the statement of financial position that the reported amounts of assets and liabilities will be recovered and settled, respectively; thereby making that statement Internally lnconslste[lt. For that reason, the Board concluded that the only question is when, not whether, temporary differences will result In taxable amounts In future years. (Emphasis added.). Paragraph 16 of FAS 109 provides that, with respect to recognition and measurement, "[a]n enterprise shall recognize a deferred tax liability or asset for .9JJ. temporary differences and operating loss and tax credit. carryforwards In accordance with the provisions of paragraph 17". (Emphasis added.)' Paragraph 17 states: Deferred taxes shall be determined separately for each tax-paying component (an Individual entity or group of entitles that Is consolidated for tax purposes) In each tax jurisdiction. That determination Includes the following procedures: 2 • • • a. Identify (1). the types and amounts of existing temporary differences and (2} the nature and. amo1int of each type of operating loss and tax credit carryforward and the remaining length of the carryforward period b. Measure the total deferred tax liability for taxable temporary differences using the applicable tax rate (paragraph 18) c. Measure the total deferred tax asset for deductible temporary differences and operating loss carryforwards using the applicable tax rate d. Measure deferred tax assets for each type of tax credit carryforward e. Reduce deferred tax assets by a valuation allowance if, based on the weight of available evidence, it Is more likely than not (a likelihood of more than SO percent) that some portion or all of the deferred tax assets will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more llkelx than not to be realized. Paragraphs 41 to 49 of FAS 109 provide the disclosure requirements for financial statement presentation. Paragraph 41 generally requires the separation of deferred tax liabilities Into current and non-current amounts based on the classification of the related asset or liability for financial reporting. Paragraph 43 provides that financial statements must disclose (a) the total of all deferred tax liabilities, (b) the total of all deferred tax assets, and (c) the total valuation allowance recognized for deferred tax assets. Paragraph 47 requires a reconciliation of the reported amount of income tax expense attributable to continuing operations for the year to the amount of Income tax expense that would result from applying domestic federal statutory tax rates):o pretax income from continuing operations . Investment companies are also subject to the accounting and reporting standards established by AICPA Audit and Accounting Guide for Investment Companies (May 1, 2006) ("Audit Guide"). Most Investment companies subject to the Audit Guide elect and qualify as RICs and, therefore, do not provide for federal Income tax. However, Investment companies that do not elect nor qualify as RICs (such as the Company) or Investment companies subject to other levels of taxation (e.g., foreign taxes) should account and report Income taxes In accordance with FAS 109. Paragraph 6.05 of the Audit Guide states: Some investment companies may be subject to state, local, or foreign taxes on net Investment income and realized gains on a recurring basis. State, local, and foreign taxes, if payable, are reported on the accrual basis, including deferred taxes on the unrealized appreciation or depreciation of investments. The staff is aware of other Investment companies that chose not to qualify _a~ ~UCc;; and these companies. genP,raU.y follow FAS 109 by recording a oefer+ed tax liability associated with the unrealized appreciation of portfolio securlties 1 • The staff Is unaware of any Investment company (other than the • See Tortoise Energy Capital Corp., ft.l,e.no. 811-21725, Form N-CSRS (Aug~ 1, 2007) and Kayne Anderson MLP Investment Company, file no. 811-21593, Form N-CS;RS (Aug. 3, 2007). 1 3 Company) that chooses not to qualify as a RIC and does not accrue a deferred tax liability associated with Its unrealized appreciation. 2. Summarv of the Company's Tax Presentation • The statement of operations-In the 2007 FS shows a provision for income taxes of $283,481 and the statement of assets and liabilities shows deferred Incomes taxes of $807,345 (referencing notes 1 and 2), accrued income taxes-current of $137,125, and net unrealized appreciation of Investments of $53,994,093. Notes 1 and 2, In pertinent part, state: Note 1 Significant Accounting Policies Income Taxes The Fund flies tax returns as a regular corporation and accordingly the financial statements include provisions for current and deferred Income taxes. New Accounting Pronouncements. On July 13, 2006, The Flnandal Accounting Standards Board ("FASB") released FASB Interpretation No. 48 "Accounting for Un~erti;!lnty In Income Taxes" ("FIN 48"). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed In the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to l:>e taken In the course o.f pr~p.arlng, the IW'lP's t~x returns to determine whether-the lax positions are "more-likely-than-not" of being sustained by the applicable tax authority. T_.allowance exists. • Notwithstanding potential deferred tax assets described above, we bel-ieve the necessary adjustments to the Company's flnanclal·statements are material to shareholders. As of February 28, 2007, the Company's NAV/Share was $54.67. When ,our estimate of the Impact of adjustments Is compared to the Company's share price as of that date, it appears that the share price was overstated by approximately 26%. s. General Comments A. Page 1 of the 2007 FS states "[t]hus, if a Copley shareholder does not redeem, the shareholder pays no taxes." Regardless of the FAS 109 analysis that will be provided by the Company, the Company has paid taxes and thus, the. shareholder has paid a proportionate amount ofthose taxes. We believe the statement should be revised to state that, while the shareholder does not pay a tax directly, they do pay taxes Indirectly througn the company, and at a rate that may be higher than If the shareholder pald such taxes directly. The consequences- of two Tevefs of taxation should also be explained. 8 • • B. The 485BPOS filed by the Company on July 2, 2007 improperly presents the fee waiver regarding the management fee. The Company shows the net manaqement fee of .63% in the body of the fee table, even though a footnote states that "[w]lfhout such waiver the fee would have been 0.71%" and that "[t]he Advisor voluntarily waived a portion of the advisory fees but It Is under no contractual obligation to do so." See Instructions 3(d)(l) and 3{e) of Form N-1A. The disclosure must be revised accordingly. Only contractual wafvers ca·n be presentea ·rn tne boay of ttie fee i:abrfi and both gross and net expenses must be shown In the fee table • .C. Rule 38a-1 under the 1940 Act mandates that the Company have a functioning Chief Compliance Officer {''CCO") and a compliance program. We note that there Is no disclosure regarding the Identity of the Company's ceo. Please provide a copy of this letter to the ceo, and assure his/her Input In the Company's response letter. Has the Company finalized a compliance program pursuant to the requirements of the 1940 Act? Please advise us who the ceo Is and make appropriate disclosure revisions, as needed. • D. In the Company's Form N-CSR, the Company provided disclosure regarding its historical performance from 1984 through 2007. The disclosure states that there was a "reserve for taxes on unrealizecLQains" for 1989. Please explain what this Is and why the Company appears to have made a change at that time. * * * * * * * * * * * * We urge all persons who are responsible for the accuracy and adequacy of the disclosure In the filings reviewed by the staff to be certain that they have provided all Jr:lformatlon Investors require. Since the Company and Its management are in possession of all facts relating to a Company's disclosure, they are responsible for the accuracy and adequacy of the disclosures they have made. · · In connection with your response to our comments, please provide, in writing, a statement from the Company acknowledging that: • • the Company Is responsible for the adequacy and accuracy of the disclosure In the filings; • staff comments or changes to disclosure in response to staff comments. In the filings reviewed by the staff do not foreclose the Commission from taking any action with respect to the filing; and 9 _, .; • the Company may not assert staff comments as a defense In any proceeding Initiated by the Commission or any person under the federal securities laws of the United States. In addition, please be advised that the Division of Enforcement has access to all Information you provide to the staff of the Division of Investment Management in our review of your filings or In response to our comments on your filings. Please note, a non-response by the Commission or Its staff to any Information you submit or fall to submit does not mean the Commission acquiesces In or agrees with any position you have taken. Please contact Bryan Morris at 202-551-6935 or Kevin Rupert at 202-551­ 6966 if you have any questions. • Sincerely, cc: •• Thomas c. Henry, Esquire Roberts & Henry 164 Honeysuckle Drive Jupiter, FL 33458 Bryan J. Morris Assistant Chief Accountant Division of Investment Management Richard F. Sennett Chief Accountant Division of Investr:nent Management Frank Donaty Assistant Director, Office of Disclosure and Review Division of Investment Management 10 • . •~~;- .. "' -· .. UNITED STATES SEC'ORJTIES AND EXCHANGE COMMJSSlON BOSTON RltGJONAL OFFICE INIIt'I'I.Yl)ol(II'IJ!,.SI!QUOili . l3RDFLOOR 33 ARCH STRE!:T BOSTON, MASSACHUSETTS 02110.1424 RY .FACSIMILE (410) 745-5802 and FIRST CLASS MAIL November 30, 2007 Thoma.'i C. Hcmy, Esq. Roberts.& Henty · 164 Honeysuckle Drive Jupiter. FL 33458 Re: ~pley t"und. Inc. CB-02335) Dear Mr. liOlU)': This Jetter confirms today's telephone conversation in which thu .starr advised you that it intends to recommend that the Commission bring an emergency civil injunctive ·action against your client,' Copley Flmd, Inc.. alleging that it violated both Rule 22c-l promulgated under Section 22(c) ofthe Investment Company Act of 1940 as well as Section 34(b) of the Investment Company Act. In connection with the contcmplated.actionJ the staff may seek preliminill)' and permanent injunctions (including a preliminary order barring the Copley fund from selling or redeeming shares at l:l net asset value that is not calculated in conformity with generally accepted accounting principles), civil monetary penalties and other relief. In accordance with Rule 5(c) of the Commission's Rules on lnformaJ and Other Procedures, 17 C.F.R. § 202.5(c), we aro otlering your client the oppOrtwlity to make a Wells Submission. We enclose for your infon~atiop a copy of SecurHics Act Release No. 531 0 entitled "Procedures Relating to the Commencement of Enforeement ~roceedings l:IIld Tennination of Staff Investigations." If your client wishes to make a written QI videotaped submtssion setting forth QflY rca.CJons of Jaw. policy or faci why it believes the civil injunctive action should not be brought, or bringing any tacts to the Commission's Httention in connection with its considemtion ofthis matter, you should forward the submission to me by no later than Decembe1· 5, 2007. Any written submission should be limited to 40 pages. and any video submission should not exceed 12 minutes. Any submission should be sent to: -e.! ... .,...,., ..... Thomas C. Henry, F.sq. November 30, 2007 Page2 LeeAnn 0. Gaunt Assistant R~gional Director Securities and Exchange Commission 33 Arch Street. 23rd Floor Boston. MA 02110-1424 . In the event the staff makes an ooforcement recommendation to the Commission on this matter, we will foiWatd any submission that you make Lo the Commfssion. Please be advised that the Commission may use the information contained in such asubmjssion as an admis.c;ion, or in iiDY other manner pcnnitted by the Federal Rule!:t of Evidence, in connection with Commission enforcement proceedings, or otherwise. This practice is explicitly provided for in the list ofRoutine Uses ofInformation (Item 4), which is contained in Fonn 1662, "Supplemental Infonnation for Persons Requested to Supply lnfonnation Voluntarily or Directed to Supply Information Pursuant to a Cornrnission Subpoena.'' For your in formation, a eopy ofFonn 1662 is enclosed. Please also be advised that any submission you make may be discoverable by third parties in accordance with appl£able law. lfyou have any questions, please contact me at 617-573·8945. ~?JI(J!Jat,#- LeeAnn G. Gau.nt Assistanl Regional Director Enclosures: Securities Act Release No. 5310 SEC Fonn 1662 I T I» Unassociated Document Page 1 of28 N-CSR/A 1 vl20186 ncsra.htm SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM N-CSR Amended CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES INVESTMENT COMPANY ACT FILE NUMBER 811-2815 COPLEY FUND, INC. (Exact name of registrant as specified in charter) 5348 Vegas Drive Suite 391 Las Vegas, NV 89108 (Address of principal executive offices) (Zip code) Irving Levine, President 5348 Vegas Drive Suite 391 Las Vegas, NV 89108 (Name and address ofagent for service) REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: 1-561-744-5932 DATE OF FISCAL YEAR END: FEBRUARY 29, 2008 DATE OF REPORTING PERIOD: FEBRUARY 29, 2008 Form N-CSR is to be used by management investment companies to file reports with the commission not later than I 0 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-l under the Investment Company Act of 1940 (17 CFR 270.30e-I). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("O:MB") control number. Please direct comments concery-ting the accuracy ofthe information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507. http://www.sec.gov/Archives/edgar/data/721291/000114420408040755/v120186_ncsra.htm 3/112012 Unassociated Document Page 2 of28 Item I. Annual Report Restated Annual Report February 29, 2008 COPLEY FUND, INC. A No-Load Fund TABLE OF CONTENTS COPLEY FUND, INC. FINANCIAL STATEMENTS FOR THE YEAR ENDING FEBRUARY 29, 2008 Table of Contents Title Page Shareholder Letter and Management's Discussion of Fund Performance l- Z ± !i Per Share Value Graph Comparative Performance http://www.sec.gov/Archives/edgar/data/721291/000114420408040755/v120186_ncsra.htm 3/1/2012 Unassociated Document Page 3 9f28 Independent Auditor's Report Portfolio of Investments fi 1.-.2. Statement of Assets and Liabilities 10 Statement of Operations ll Statement of Changes in Net Assets 12 Statement of Cash Flow 13. 14­ Notes to Financial Statements -.lll Financial Highlights 20 Disclosure of Fund Expenses 21 Supplemental Data 22 22 General Voting Proxies on Portfolio Securities Disclosure of Portfolio Holdings Approval of Investment Advisory Agreement About the Fund's Directors and Officers Inside Back Cover TABLE OF CONTENTS Tel: (508) 674-8459 Fax: (508) 672-9348 COPLEY FINANCIAL SERVICES CORP. Adviser and Administrator to Copley Fund, Inc. Post Office Box 3287 Fall River, Massachusetts 02722 April 2008 Dear Fellow Shareholder: November 30, 2007, was an eventful day for the Copley Fund. The Securities and Exchange Commission (SEC) compelled us to change our method of accounting for deferred income tax on all unrealized gains. The unrealized gain in our approximately $90 million portfolio was about $60 million. This accounting change reduced our per share value by $13.89 by increasing a deferred liability to a level that would be realized only if the entire appreciated portfolio was liquidated. This change did not affect the total assets of the Fund and they remain intact. The Board immediately began to explore ways in which the Fund might be able to restore some or all of this reserve to the NAV. One of these avenues, a change in the Fund's state venue from Florida to Nevada, provided a direct benefit to the Fund by reducing our per share adjustment to approximately $12.00 per share. During our thirty years of existence we had always maintained a reserve for unrealized gains which has always been more than sufficient to cover any capital gains tax liability. As you consider this issue, it is important to note that the only way we would have to actually pay out the full reserve would be an entire liquidation of Copley Fund. Obviously we do not intend to liquidate and go out of business. Management and the Board of Directors strongly disagree with the SEC's position and are actively attempting to identify and pursue any alternatives which may be available to restore some or all of the reserve to NAV. Of course, there can be no assurance that we will be successful in these efforts. Thus, we are left with a price per share that reverts back to 2005 and 2006. However, we now have nearly an additional $17 million of tax reserves giving us income and hopefully stock increases to add to our net asset value. This change in treatment of deferred income tax is an accounting issue and no capital gains http://www.sec.gov/Archives/edgar/data/721291/000114420408040755/v120186_ncsra.htm 311/2012 Unassociated Document Page 4 of28 taxes have been paid nor are any even currently payable. The Fund retains all of its current assets and continues to earn dividends in everincreasing amounts and gains (or losses) continue to be taken on the entire value of the portfolio which is approximately $90 million. This unexpected reserve caused Copley to have a loss of 10.8% in 2007 instead of a gain of 12.2% under normal circumstances. Our sector diversification insulated us from much of the havoc of the market. Utilities and energy stocks were some of the prime movers in our substantial market gain. The financial sector was particularly hard hit by the mortgage market and tightening of credit. We were fortunate in disposing of a fair amount of our financial stocks in September thus avoiding the huge losses which occurred during the balance of the year. The volatility of the market in 2008 causes us to cite averages in approximations as stocks and sectors can change as much as 2% daily. At this writing Copley is down between 4.5% and 5% year to date. The Dow Jones average is down between 5% and 7%. No major sector is up. However the financials have been the hardest hit. Our reductions of this sector in September of 2007 saved us from much larger losses. Note also our defensive cash position is approximately 11% of the portfolio. 1 TABLE OF CONTENTS Our retail associates in whose stores Copley Operating Division had the bag departments closed the majority of their stores which caused a substantial decrease in our operating volume. Thus we decided to expand in another direction. Over the years we have had a close association with two families, Raffa and Riccardi, who individually have been in the country Italian Restaurant business for over 50 years, owning among them nine restaurants. Patrick Riccardi, 53 years of age, has worked in one family restaurant for 35 years. Based upon his experience and success Copley Operating has elected to open a restaurant in Bristol, RI called Rice's Ristorante and to employ Mr. Riccardi as it's operator and manager. We look forward to the same success and tradition that the Raffa and Riccardi families have achieved. Meanwhile we are continuing our same investment philosophy, i.e., highly visible and dividend paying stocks in ever increasing amounts. Note our dividend income is at an all time high and should continue to add substantially to our net asset value. We communicate with our Chicago consultants very often for exchanges of ideas. Thus the Fund is assured of long term continuance. We are making every effort to keep our expense ratio close to normalcy but with the challenge of the accounting issue and Sarbanes-Oxley it is no easy task. However, please remember that we have all of our assets intact, we have not been subject to credit or sub-prime mortgage problems; thus, we look forward to the future. All the above are reflected in our chart and the following numbers. 1984 + 23.9% 1985 + 25% 1986 + 18% -8% 1987 1988 +20% 1989 +16% 1990 -2% 1991 +18% 1992 +18% 1993 1994 +10% -7% 1995 +26% 1996 +5% 1997 +25% (Top performing Fund 1984) http://www.sec.gov/Archives/edgar/data/721291/000114420408040755/v120186_ncsra.htm 3/1/2012 Unassociated Document 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Page 5 of28 -6.86% + 22.50% -9.30% -13.9% + 14.31% + 12.99% +5.89% + 19.70% -10.83% -7.48% (Reflects the increased tax reserve) (As of March 31, 2008) 2 TABLE OF CONTENTS Note. The performance figures provided for years prior to 2007 are consistent with the information furnished in prior reports and do not reflect an adjustment for the change in accounting treatment of deferred income tax. The performance data quoted represents past performance and investment return. Principal value of an investment will fluctuate so that the investor's shares, when redeemed, may be worth more or less than the original cost. Please remember that past performance does not guarantee future results and current performance may be higher or lower than the performance data quoted. Our thanks are to our Board, and to the many shareholders who contacted me over the past several months. All these shareholders expressed an appreciation for our Funds past performance and look forward to the future. Cordially yours, .. .·fl.. ~ ~ ·-.;.. . ·vrJ~ J :. · . ·: . . . .· . . Irving Levine President P.S. The Wall Street Journal no longer lists Copley Fund under Mutual Funds as its minimum assets listing is one hundred million dollars. However, one can get our net asset value daily over the internet. Go to Google home page search for Copley Fund then click on Mutual Funds and it will bring up Copley. 3 TABLE OF CONTENTS COPLEY FUND, INC. PER SHARE VALUE http://www.sec.gov/Archives/edgar/data/721291/000114420408040755/v120186_ncsra.htm 3/1/2012 Unassociated Docmnent Page 6 of28 C/.04 ·-· ROY ,P.. -· P.as ·' .· Copley Fund, Inc. Tax Management s~ategy Alternativ~ Page l Scopa. 'I'he purpose of this paper is to :review the tax status of Copley Fun~, Inc., and the ralated requiremen~ to accrue deferred income taxes. Bxeoutive Summa~y. The Internal Revenue. Code, 1986, as amended, provid~s two types of income tax treat-ent for investment companies: taxing net investment income at the corporate level or at the individual shareholder level. In order to transfer the taxation of net invaat:ment income to the shareholder level, at least go% ot net invest~ent incQme must be distributad annually to shareholders and other qual:.rf1cations must be met. since the Fund. has not made annual dividend distributions t:.o shal:'ehold~rs 1 all federal and -stata inoo~e taxes are applied directly to the Fund. By virtue of retaining tho income ta~ liability associated with investment income, the Fund .must aocrue current and future income tax liabilities on realized and. unrealized gai.ns frolU investments made by the Fund. For the period ending August 31 1 l992J the Fund had a current in~ome tax liability of $151,515 and a d•f•rr•d income tax liability of $3 1 .541 1 000. Both Of those amount$ serva to ~educa the nat a~~~t value dQtermin~d daily by the Fund. The racoqnized deferred when the \ \,~.:E:!J income tax liability will be realized and applicable aeoul:'ities . are sold; the full deferred income tax liability will be recognized when the entire portfolio ia liquidated. since it is not the intention of the Boa:r:d of Directors to liquidate the Fund or pay more corporate inoomQ taxAs tha.n ne.eAs£ary, .it i• appropriate for the Board to look at alternate tax ~anagement techniques. Electing re9ulated investment company tr~atmQnt when it is deemed to be in the best interast of thA Fund is. an appropriate a_lte:rnativa tax management technique. If the aoa~d of Diraetor~ were to eleeted to be taxed as a regulated investment com.pany, the liability for the tax on unre~lizad qains would ahift from the Fund to individual shareholders. AccorQinqlyf the Fund would not have a req~iremQn~ to accrued dGf&rrad inoa.ma tax on unrealizad gains as a part of the overall liabilities of the Fund.. The liability should. not be dropped to z&ro, however, since it would be a reasonable expectation that th• Puna would realize some qe.ins prior to o.lect.ing regulated inveetmQnt company treatment. ~J y lgJ VUJ ..... . . ·~ . . ·p. 06 ... Copley Fun~, Inc. Alternative Tax Management Strategy .l?age ~ The Fund ia registered with the SecUr-ities _and Exchange Co~ia~ion ~$ a diversified, open-end manaqement company under the provis~ons of the Investment Company Act ot ~940, as a~ahded. The Fund has elected to hold rather than distribute to shareholders net investment inoome, therefore, the· Fund is taxed as an ordinary corporation rath&r th~n as a requlate.d investment company. \ -~ ~~ Since distributions are not mada to shareholders, the Fund is liable for federal ~nd stat• income taxes on amounts rsceived from interest1 dividen~s, capital qains, ancl operating division net income. An ordinary corporation is currently taxed for.federal income tax purposes at rates ot 15% to 34%, depending upon the amount of its taxable. inoome. Further, the alternative minimum tax may be applicable at a rate ot 20,. ~he Fund's overall tax liable is substantially reduced. eaeh year by the applioation of a 70% div iaends received deduction on qualified dividends. This tax advantage ie partially offset by the requirement to add back the aiviclends received d.eauotiQn for the calculation of.· alternat.ive minimum tax. In the yeara that c:lividend income is a substantial portion of investment income, the Fund will nave an alternative mi~imu~ tax liability. Capital gains are currently taxed ~t a corporation's marginal tax rate, i.e., 1St to 34%. The current ~aximum eapital gains tax -rate for individuals is 2St. With a spread . of six pe:rcentaqe points be.tween the corporate and individual capital qains rates, it would be prudent for the Fund to consider transferring the income tax liability to individual shareholders when a principal portion of the security portfolio was subject to liquidation. A method readily available to the Fund is to qualify as a regulated inveatm~nt oompan¥• RegUlated Inveatmant Coap~y. The companies special (~ICs) tax tr~atment accorded requlated irtvestment under Subchapter M of the Internal Revenue Code, ··1986 1 as amendAd, retlActs leqislative reoo;nition of tbe fact hat such oompanies ax-e, in fact, primarily conduits. The rund is raliaved of corporate. ineome taxes to whieh it would otharwi.se be subject e.s a separate taxable entity except for income retained at ths oorporate level. In order to be taxed as a requla ted investment company, a +>"'"''• e~3vtdaads~~aid d•d.uetion--that is, the amount distrib\J.tect to .. •.. ~0 y G • -··-· · · ·1 f.l A L E - t F' A .... •.....____..:.--.......,.~..\. rl..,...ih.tetionr 31;11 9 3 4 a 98.4 P.e7 copley Funa~ Inc. AltQrnativ• Tax M~nagement St~atagy 1 · Fi!tqe 3 ~ 1 · ~ I I lQast the su~ ot: {1) $0 percent of ~he company's investment company taxa~le income, computed wijthout dea'Qcting a dividends ~ee~ived deQuction, plus (2) 90 percept of its net exampt inter~st J.ncome, . ~apital gains ar• treated sepat-ately.. A R.IC may holcL,or dlstrl.bUte any pot't~on of the capital!9ain realized during ;the tax yaar. If the ~IC dJ.stribut&s 100% of;the capital qain realized it receives a 100% dividends paid deauction; if it distributes SO% it receives an sot dividands paid aed~ct~on. i An investment com};)any desirin9 !to qualify as a regulated inv~stment company will proceed .qener~lly as follows; ! ~· (1) adopt a q~alityinq form of organization (Copley ~lready .meets this r~qu.irem~nt); . ; · .! .· . (2) ioentify the first taxable y~ar in whieh it seeks to so qualify; . . ! · . ; (3) arranqo. and maintain a portlt:olio mix that meets gross inoome and diverai£ioation requiremen~s; · . (4) declare and pay dividends to lits shareholders before th$ end of the year o:r shQrtly thereafter 1, · . to {5) file~ tax.return electing be a regulated investment company and refleeting that it has met the distribution anq ~elated rules fo~ being taxed und•r Subchapter M of the Internal Revenue Code, 1986, as amended. cunqi.nq trom. a .t•c;ulaX' cOJQpany .. oo~p!, .. -·- Net investment income (loss) 1.18 1.02 0.99 0.85 0.95 0.67 Net gains (losses) on securities (both realized and unrealized) . . . . . . . . 6.63 1.96 3.63 7.08 (7.28) ·(2.95) Total investment operations 7.81 2.98 4.62 7.93 (6.33) (2.28) Net asset value, end of year $ 54.67 $ 46.86 $ 43.88 $ 39.26 $ 31.33 $ 37.66 Total return . . . . . . . . . . . . 16.67% Net assets, last day of February (in thousands) 86,868 11.77% 25.31% (16.81)% 72,079 69,473 57,644 6.79% 74,646 (5.72)% 76,607 :::-·:_ :-._.. Ratio of expenses to average net assets . . . . . 2.37% 2.26% 2.33% 2.42% 2.47% 1.70% Portfolio turnover rate . . . . . . . 0.50% 0.73% 0.44% 0.92% 8.65% 3.33% Number of shares outstanding at end of period (in thousands) .. 1,589 1,593 1,643 1,770 1,840 2,034 :-.: . : . :·:- :~ _-: -: .. .. - ... (a) Total return for periods less than one year are not annualized. (b) Rutio of expenses presented exclude income taxes. (c) Annualized for periods less than one_ year. The accompanying notes are an integral part of the financial statements. 18 -··.-:··. .. . ... .. __ , .. _. -:!". _:;·-~~:_=_·:~-~~ (_··=: -.;:. -·-: --:-­ .... ··=··.::::::::··:·.:::::.·:::::::·~-··:==· ·_:·=.A. 3341>8. 166ll 744·598S FAX C56ll 207·6857 E-MAIL: RobertsHemyLaw@aolcom 101 Bl:JEN.AVlS'llA .A.VXNOEI Jlm)llllU.LSBURG, MD I. !Wisa IUOI ~:9376 504~STREET P.O. Box 1138 ST. MicHAELS, MD 21663 C41018i!ll·44156 FAX IillO) '754-9876 :B'.A%14101754·9376 October 5, 2009 Lawrence Pisto, Esquire ·'"·· U.S. Securities and Exchange Commission Boston Regional Office 33 Arch Street, 23rd Floor Boston, MA 02110 • RE: In the Matter ofCopley Fund, Inc.sition paper prepared by Roy G. Hale, CPA, dated November27, 1992 (See Attachment "A"). The decision was memorialized in the Minutes of a Meeting ofthe Board ofDirectors held on December 7, 1992 to implement the strategy wherein the Directors instructed "that Fund Management shall monitor on a regular basis the Fund's potential income · tax liability on unrealized gains to ensure that the present reserve is, in its best business ­ judgment, appropriate given the particular circumstances ofthe Fund's portfolio and policies." The basis for the adjustment-to the Fund's previously accrued tax liability was set forth in Note 1 to the Fund's financial statements for the year ended February 28, 1994 as follows: "in this accounting period the Fund elected to change the estimate ofdeferred income tax liability on unrealized appreciation of investments... the Fund will provide deferred taxes for unrealized appreciation on its investment portfolio to the extent that management anticipates a liability may exist. .. this change is consistent with the Board ofDirectors intent to qualify the Fund as a Regulated Investment Company in the event the Fund's future income tax liability should exceed current (reserved) deferred income tax levels." • Memorandum (cont) • Page 3 of14 The Fund has, for more than 15 years, consistently maintained that the amount ofthe deferred income tax liability for the Fund is an accounting estimate that is properly based upon a reasonable estimate ofthe future obligations ofthe Fund as it relates to the difference between the tax basis ofthe Fund's assets and their reported mark to market current value. The Fund recognizes all cWTent income tax obligations in the current accounting period. It has been the Fund's longstanding position, sine(: 1993, that the deferred tax liability for unrealized capital gains should be based on a good faith business judgment estimate of future tax obligations associated with any required liquidation ofportfolio securities necessary to raise cash to meet foreseeable Fund requirements. • The key concept here is that the deferred tax liability carried by the Fund on any given date is an accounting estimate of future obligations of the Fund. This estimate is based upon various factors including (1) capital loss carry forwards (2) anticipated redemptions beyond the ability of the Fund to cover with its current cash position or through the sale ofnon-appreciated securities (3) the amount ofthe recorded reserve for the estimated maximum tax liability (4) fifteen (15) years ofoperating history without ever exceeding or even approaching the reserve established by the Board (5) the Fund's stated investment strategy and track record ofholding high quality, dividend paying stocks for the long term (6) the fact that the entire deferred tax liability would be due only in the unlikely event the entire portfolio were liquidated and (7) the best good faith business judgment ofthe Board of Directors. These factors are, and historically have been, used to establish a reasonable and realistic basis for the estimated tax liability. And, as discussed below, the option to convert the Fund to RIC status establishes a floor upon which the estimated taxes would not be exceeded. ACCOUNTING AND REPORTING FOR INCOME TAXES The essence ofthe issue is Copley Fund's accounting and reporting ofthe effects of potential income taxes. The staff's initial theory is understood to be that the Fund had not measured and disclosed the future tax consequences ofthe unrealized appreciation of securities in the Fund's portfolio in accordance with generally accepted accounting principles ("GAAP"). In support ofthis position they have referenced the Financial Accounting Standards Board's ("FASB") Statement ofFinancial Accounting Standards No. 109, Accounting for Income Taxes ("FAS 109"). FAS 109 "establishes financial accounting and reporting standards for the effects ofincome taxes that result from an enterprises activities during the current and preceding years." • Pamgraph 6 ofFAS 109 states that "the objectives ofaccounting for income taxes are to recognize (a) the amount oftaxes payable or refundable for the current year and (b) deferred tax liabilities and assets for the future tax consequences ofevents that have been recognized in an enterprises' financial statements or tax returns." •I Memorandum (cont) Page4 of14 · Paragraph 11 ofFAS 109 provides "An asswnption inherent in an enterprise•s statement offinancial position in accordance with generally accepted accounting principles is that the reported amounts ofassets and liabilities will be recovered and settled. respectively. Based on that assumption, a difference between the tax basis ofan asset or liability and its reported amount in the statement offUl.Bilcial position will result in taxable or deductible amounts in some future year(s) when the reported amounts ofassets are recovered and the reported amounts ofliabilities ate settle4"· (Emphasis added.) · Paragraph 78 ofFAS 109 makes the observation that an "enterprise might be able to delay the future reversal oftaxable temporary differences by delay~g the events that give rise to those reversals, for example, by delaying the recovery ofrelated assets or the settlement of related liabilities. A contention that those temporary differences will never result in taxable amunts, however, would contradict the accounting assumption inherent in the statement of financial position that the reported amounts of assets and liabilities will be recovered and settled, respectively; thereby making that statement internally inconsistent For that reason. the (Accounting) Board concluded that the only question is when. not whether. temporarv differences will result in taxable amounts in future years." (Emphasis added). The staffs initial theory then seems to be based upon a static and inflexible interpretation ofFAS 109 to the effect that the statement requires a full accrual ofthe maximum potential deferred income tax liability-period ("full liquidating value accrual method''). As more fully developed below, the Fund believes that FAS I09 and OAAP are flexible enough to pennit variations or exceptions that are nonetheless in compliance with OAAP and are, in fact, required to fairly present the financial condition ofthe Fund and the accurate pricing ofits shares. This, the Fund has always maintained, is best accomplished through the use of a ''reserve" for deferred income taxes which is established by the Fund's Board ofDirectors in an exercise of their good faith business judgment. • • :rJle fundamental justification for recognizing an exception to or a variation from FAS 109 is that the full tax liability will not be recognized by the Fund. FAS 109, as set forth above, plainly states that the requirement for full accrual is based upon "an assumption, that the underlying appreciated assets would eventually be sold and the associated income tax would eventually be paid. This simply is not the case and is, under the circumstances, an invalid and misleading assumption. The effect of applying this invalid assumption is that a full liquidating value accrual overstates Fund liabilities and understates the Fund's equity as reflected in the ~d's Net Asset Value. In support ofthis proposition the Fund advances the following points: 1. The use ofhistorically proven good faith estimates represents the best method of fairly presenting the Fund's financial condition. The amount of a reserve for income tax, • • Memorandum (cont) Page 5 of14 reported as a liability, is in fact an estimate of a future potential liability and not a real liability on the date of the financial statements. These estimates, based upon the factors as discussed above; are flexible and subject to change as circumstances dictate. As long as the Fund provides reasonable estimates that meet current and future obligations, as bas been the case for the last fifteen (15) year8, the Fund meets its inherent obligation to accurately accrue for this potential liability. The following chart demonstrates the viability ofthe established reserve. COMPARISON OF RESERVE ESTABLISHED BY BOARD AND ACTUAL CAPITAL GAINS TAXES PAID BQARD ESTABLISHE!! CAPITAL {IAINS TAX RESERVE 1007 1006 1005 1004 • 2003 1002 2001 :zooo 1999 1998 1997 1996 1995 1994 1993 $807,345.00 $758,766.00 $758,766.00 $824,472.00 $770,554.00 $664,576.00 $443,285.00 $464,563.00 $373;709.00 $278,488.00 $189,891.00 $378,955.00 $422,000.00 $422,000.00 $422,000.00 A,CTUAL ~APIT~ !ZAINS IAXE~ PAID FULL LIQUIDATIN!! RESERVE FOR CAPITAL GAINS LIABILIIX ACCRUAL $0 $0 $0 $0 $17,537,872.00 $16,104,320.00 $14,887,774.00 $12,548,834.00 $7,602.562.00 $13,166,255.00 $15,646,991.00 $10,961,527.00 $13,684,586.00 $13,224,672.00 $8,193,495.00 $7,160,983.00 $2,756,751.00 $3,843,489.00 $5,430,633.00 so $0 so so $0 so $0 so $0 $0 $0 No taxes have ever been paid because the Fund's tax liability for capital gains bas always been covered by either capital losses or capital loss carry forwards. Hence, the reserve has never been used. One ofthe concerns expressed by the staff has been that circumstances beyond the control ofmanagement might cause the Fund to liquidate portfolio securities due to market conditions or to meet redemptions. It is important to note that even in this time of unprecedented financial crisis and market upheaval Copley Fund lias not even come close to invading the tax reserVe established by the Board. And, we note that this is at a time when money market funds have had to turn to the Federal government to preserve their $1.00 NAV and mutual fund redemptions are at an all time high-once again sustaining the Board's judgment. •• 2. The only shareholder risk associated with using the reserve method, which is based upon good faith historically proven estimates, would arise in the event that the Fund ..· Memorandum (cont) · Page 6 of 14 · understated the reserve and a real ~iability greater than the reseiVe would become due and payable. As shown by the above chart, this has never happened over the past fifteen years. More. noteworthy perhaps is the fact that it has not happened over the past two months. Moreover, this would never occur because ofthe Fund's intent and expressed ability to convert to RIC status ifit ever is placed in a position where the reseiVe was in an insufficient amount to cover the capital gains tax on appreciated securities. This begs the question of why the Fund luis not elected RIC status subsequent to the compelled inclusion ofthe full accrual in its NAV.- The short answer is that the reserve established by the Board never was exceeded because ofmarket or other operating conditions. No tax ever became payable. The accrual only became an issue when the Fund was compelled, under threat of injunction, to include the full amount ofthe accrual in its NAV. Election ofRIC status has consequences, as discussed below, and the Board believes that it should not be "compelled' to accept these consequences when the conditions precedel)t establisht:d by them before electing RIC status have not been met. . In light ofthe Fund's ability to convert to a RIC, as more fully explained below, and ultimately avail itself of the elimination ofthe tax otherwise payable at the corporate level on appreciated securities the Fund believes that the inherent assumption made in Parilgraph 11 of FAS 109, i.e., that liabilities will be recovered and settled, does not properly apply to the instant situation. Moreover, the statement in Paragraph 78 ofFAS 109 that ''the (accounting) Board concluded that the only question is when, not whether- (tax liabilities will be realized)" supports the Fund's belief that GAAP does not require the Fund to ·accrue the full potential deferred tax liability because the ability to convert to a RIC on its own terms answers the ''when" questionnever. • • CONVERSION TO RIC Regulated Investment Companies ("RIC's") may escape full corporate taxation because, unlike ordinary corporations, they are entitled to claim a deduction for dividend payments against ordinary income and net capital gains. A corporation qualifies as a RIC ifit makes an irrevocable election to be a RIC by filing a tax return on Form 1120-RIC and it meets certain requirements specified in JRC Sections 851 and 852. In order to qualify for this election, the Fund would be required, among other things, to distribute to shareholders its undistributed earnings an~ profits ("E&P''). · The Fund could elect RIC status simply by filing a RIC tax return for the year in which the status is deemed to be effective. Any capital gains taxes due and payable at the end ofthe tax year, which in theory would be greater than the re~e, would then be shifted to the individual shareholders2• The result is that the Fund would pay the tax on capital gains equal to the reseiVe 2 Under current law, the capital gains taxes due on net realized gain only would be due at individual rates which are now much lower than corporate rates. This Is another example ofwhy tho ''full liquidating value reserve" method Is not only inappropriate but also seriously misleading. • Memorandum (cont) • Page 7 of14 and shift the remainder ofcapital gains to shareholders. Given this methodology, the Fund would never exceed the reserve. As noted above, the Fund would have to distribute its accumulated E&P up to the date RIC status was elected. The Fund would have until the end of the current tax year to make this distribution. The accumulated E&P could be relatively large ($11,844,182 at February 29, 2008). This begs the question ofwhere the money would come from to make the required distribution without selling portfolio securities and generating additional capital gains tax for the Fund. The answer is that the Fund could distribute additional shares in the Fund rather than cash and, while the distribution ofstock would decrease the value ofthe Fund, the shareholders would receive something in value to compensate for the devaluation. The shareholders would be subject to income tax on the received distributions, generally taxable at rates lower than the coiporate tax .rate which does not distinguish between ordinary income and capital gains; but the key point is that the. distribution would not generate capital gains taxes for the Fund. • The last tax issue to be considered in a RIC conversion is ~e built in gains ("BIG") tax on appreciated assets. Current IRS regulations require a new RIC, which was previously a C Corporation, to pay a built in gains tax on appreciated assets ifthe assets are sold within ten (10) years of the RIC conversion date. Ifall or any portion of the appreciated assets are not sold within this 10 year period, the built in gains tax goes away. It simply ceases to exist This begs another question which is at the heart ofthe matter. Does the potential liability for BIG tax require a full acci'\liU under FAS 109? The answer is no because ofthe basic assumption under FAS 109 that the full accrual is based upon the premise that the appreciated assets will be sold and the associated income tax paid at some point in time. ThiS simply is not the case when there is, or could be, a date certain when the liability would cease to exist. Because ofthis "date pertain test'' the potential BIG tax represents at most a contingent liability rather than a real, current liability. This contingent liability has been fully disclosed in the Fund's Prospectus and SAl for many years. 3 Since inception, management ofthe Fund has not elected RIC status and met the required distribution requirements but rather has. opted to be treated as a regular C Corporation. Underlying this decision is the fact that the dividends received deduction is available to a C Corporation but not available to a RIC. This concept is critical to the Fund's basic investment strategy to create dividend income to the Fund using the 700/o deduction from federal income taxes for dividends received. Thus, the Fund's regular income tax liability is kept to a minimum and shareholders are allowed to defer taxes until redemption. 3 • The staff ofthe Division ofInvestment Management bas reviewed the capital gains tax accrual issue In connection with registration starement.s and. financial reports filed by the Fund since 1993. In each Instance, until September of 2007, the staff accepted, or at least took no action with respect to, the Fund's rationale for using a reserve method of accounting for such acc;ruals. Tandy statements notwithstanding thls lack ofaction provided the Board with an understanding that the rcsCIVe methodology was not contrary to GAAP or applicable SEC rules with respect thereto. Memorandum (cont) Page 8 of14 Hence, conversion to a RIC is a viable alternative to the Fund but is contrary to the Fund's stated investment objective and strategy. Therefore, it is not somethlng that should be undertaken unless the conditions precedent to making the election, exceeding the reserve, have been met. These conditions precedent have not been met. The established reserve has never been exceeded or even invaded. The important concept for purposes of a deferred tax liability standpoint however is that the potential liability can be eliminated. The ultimate liability therefore is not a certainty. In fact, it is a contingent liability which at the end ofa ten year period simply ceases to exist. • GENERALLY ACCEPTED_ ACCOUNTING P~CIPLES Generally Accepted Accounting Principles ("GAAP") consist ofthe basic principles, assumptions and guidelines, the detailed rules and standards issued by the Financial Accounting Standards Board ("FASB") and the generally accepted industry practices. GAAP are neither law nor regulation. The Securities and Exchange Commission ("SEC'') however, has promulgated a regulation which provides, in pertinent part, that "financial statements filed with the Commission which are not prepared in accordance with generally accepted accounting principles will be presumed to be misleading or inaccurate, despite footnote or other disclosures, unless the Commission has otherwise provided." Rule 4-01. Regulation S-X (emphasis added). For all of the reasons set forth herein the Fund believes that this p~sumption has been rebutted. • GAAP was developed to ensure that :finaD.cial transactions are recorded in a consistent manner, to require standardized reporting formats, and to permit comparability with prior year(s) information and statements prepared by other business entities. GAAP has evolved over the years from a basic framework and from basic objectives of financial reporting. Financial reporting should provide useful information for making informed business and economic decisions. Usefulness for decision making is the most important characteristic ofthe reported information. To be useful, financial statements must be relevant, !&, they must make a difference in the decision maker's (investor's) ability to predict the future or to correct prior expectations. Hence, useful financial statements provide information about what has happened in the past as well as information that will help in predicting what will happen in the future. Financial Statements must also be reliable. To be reliable they must be veriftable, neutral and unbiased and the information presented must represent what really happened or existed. In addition, the statements must be comparable (measured and reported in a similar manner by all types ofbusinesses) and consistent (the same accounting methods should be applied from period to period). In other words, deviations in measured outcomes from period to period shoUld be the result of deviations in performance not changes in methods. Because of the change in the capital gains tax accounting treatment and related·financial restatements, the Fund's financial statements are not n~w either "useful" or "reliable" within the framework of GAAP. • • Memorandum (cont) Page9ofl4 FUND FINANCIAL STATEMENTS SUBSEQUENT TO THE ISSUANCE OF THE RESTATED ANNUAL REPORT FOR THE PERIOD ENDED FEBRUARY 29, 2008 ARE · CONTRARY TO THE BASIC OBJECITVES OF GAPP AND UNDER THE SPECIFIC CIRCUMSTANCES OF THE FUND'S BUS1NESS ARE MISLEADING Pursuant to staff comments received in connection with the Fund's annual485APOS updating amendment to its registration statement filed on June 6, 2008 the Fund was required to file an amended N-CSR/A which contained a "Restated Annual Report to Shareholders", This restatement caused the Fund to ''restate" much of its historical financial information including average annual returns, the per share value table and the financial highlights table. This restatement of historical information was required because the Investment Management staff required the Fund to treat the inclusion ofthe full liquidating liability accrual in the Fund's NAV as a "correction of an error" as opposed to a "change in accounting estimate" which would not have required a restatement ofhistorical information. The consequence ofthis is that the Funds' financial reports have not now been compiled in a consistent manner. This is clearly illustrated by comparing the Financial Highlights Tables for the period ended February 28, 2007 and February, 2008 (restated) (See Attachment "B"). • Prior to this requiied restatement the Fund's financial statements were completely within the basic framework and objectives ofGAAP reporting as discussed above. In fact, the PCAOB exanrlned the Fund's auditor's financials and report thereon for the period ended February 28, 2006 and issued an affirming clean report thereon. The financials had been recorded in a consistent manner for 30 years. They permitted comparability with both prior year(s) information and the financial statements prepared by other Funds. They were useful because they enabled informed decision making by an investor because they correctly set forth what happened in the past and provided information about what will likely happen in the future. They were reliable because they were verifiable and the information represented what really happened from a historical perspective. For example, the Fund's actual NAV per share at February 28, 2007 was $54.67 and it was reported as such in the Fund's Annual Report of even date.· Yet, the Restated Annual Report for the period ended February 29, 2008 reflects a per share value for that same date (February 28, 2007) of$42.54. This simply does not reflect what really happened, is not consistent and thwarts comparability with prior years. Contrary to one ofthe basic objectives of GAAP-there are now deviations in measured outcomes from period to period which are the result of changes in methods rather than deviations in performance. THE INCLUSION OF TilE FULL LIQUIDATING LIABILITY ACCRUAL IN TilE FUND'S NAV IGNORES BASIC GAAP ASSUMPTIONS, CONSTRAINTS AND MODIFYING CONVENTIONS • The foundation of GAAP consists ofbasic assumptions, basic principles, basic constraints and modifying conventions. Some ofthese are particularly relevant herein. Memorandum (cont) Page 10of14 Assumptions: (1) Going Concern Assumption: This assumption assumes that a business will continue operating and will not close or be sold. Based on this assumption, actual costs instead ofliqui~tion values are used for presenting financial information. • Principles: (1) Historical Cost: (1) Realization/Revenue Recognition: This principal requires companies to record revenue when it is realized or realizable, i&., at the time of actual sale. (2) Matching Principle: This. means recording the revenues ·~ed during a period using the revenue realization principal and matching the revenues with the expenses incurred in generating this revenue. (3) Adequate Disclosure: This. principle states that all pertinent information should be fully disclosed and in understandable form. Constraints and Modifying Conventions. The modifYing conventions include (1) Application of Judgment- an accountant may depart from GAAP ifthe result or departure appears reasonable under the circumstances, especially when the $ict adherence to GAAP will produce unreasonable results, (2) Substance over Form- the economic substance of a transaction determines the accounting treatment, even when the legal aspects of the transaction indicate othenvise and (3) Industry practices and Peculiarities- the peculiarities and practices· ofan ind1lStry may warrant selective exceptions to accounting principles. Utilization of a full liquidating value accrual method is contrary to the basic "going concern" assumption of GAAP that a business will continue operating and will not close or be sold. Based upon that assumption actual costs and liabilities instead ofliquidation values are to be used for presenting financial information. The use ofthe full liquidating value method in the present circumstances makes the exact opposite assumption that all portfolio securities will have to be completely liquidated today. This simply is not the case and is unrealistic·and misleading. • The full liquidating value accrual method also is contrary to the principles of realization/reven~e recognition and matching. Full accrual transforms a potential contingent liability into a full current liability and fails to match current revenues and assets with correct liabilities. This, in tum, makes another principle, adequate disclosure ofall pertinent information in understandable form, difficult at best. Prior to being compelled to restate the Fund's · financials, they were presented in an easily understandable form. The Fund does not now believe that this is the case. While those restated financials ~ntain all ofthe staff's comments made thereon, the Fund nonetheless believes that they are far from easily understandable and are in fact misleading. · Insofar as the modifying conventions are concerned it is stated at the. outset that the Fund believes that its historical financial..statements have always been compiled in accordance with GAAP. However, it is important to note that GAAP recognizes certain constraints and modifying CO:J?.Ventions that allow an accountant to dep~ from GAAP ifthe result or departure appears reasonable under the circumstances especially when the strict adherence to GAAP will produce unreasonable results. Assuming arguendo that the use ofthe reserve method is a • • Memorandum (coot) Page 11 of14 "departure" from OAAP it certainly appears reasonable under the circumstances especially here, where the use of the full liability accrual method produces an unreasonable result, i.e., a per share net asset value which does not reflect the realistic net assets ofthe Fund, distorts performance and expense ratios, and disables redeeming shareholders from receiving their fair proportionate share ofFund assets. Copley Fund is unique among all other Funds4• To the Fund's knowledge it is the only C Corporation the share price of which is based upon a mark to market NAV as opposed to a value based on supply and demand for its shares. This does not make it "bad" or "wrong"-just different. The Fund also notes that because of this uniqueness the Fund's use ofthe reserve method will not impact other mutual funds. On the other hand, ifthe Fund's methodology is applied consistently, as it bas been in the past, and is fully understood by all shareholders through ample disclosure, it will facilitate comparisons with other mutual funds and will not result in overstated performance.- This makes a substance over fonn approach compelling under the circumstances of the Fund. For this reason alone the use of a reserve method falls well ~thin the judgment parameters of GAAP. • All ofthis demonstrates that sometimes variations from strict interpretations ofGAAP · are requfred5• Whiie the Fund believes that its financials historically have been compiled and presented in accordance with GAAP the modifying conventions make clear that GAAP is not "carved in stone" and that variations are made and considered acceptable. Ifnothing else, GAAP and FAS 109 are not clear on the appropriate calculation of a tax accrual particularly in view of the fact that the "inherent assumption" underlying FAS 109 is not present given the particular circumstances ofthe Fund. CONCEPTS OF FAIR VALUE . . The Copley Fund is currently valued at its liquidation value. Simply put, this does not represent the fair value of the Fund's shares. It ignores reality and misstates the assets ofthe Fund. · • 4 Therc arc at least two other lovestmenl companies thai have not elected RIC status and record a deferred tax liability associater the Board •s decision is summarized below: (1) • The use of a full liquidating accrual methodology is unrealistic. It assumes the liquidation ofthe.entire portfolio ofthe Fund's securities. Neither the Board nor management bas any intention to liquidate. Nor do they believe, or anticipate, that there exists any circumstances which would compel a liquidation of the Fund's entire portfolio ofsecurities. As illustrated by the following table, the history ofthe Fund for the past 15 years supports this position: -3­ Copley Fund, Inc. Supplement dated November _ ___ 2008 to Prospectus dated July 24, 2008 • COMPARISON OF RESERVE ESTABLISHED BY BOARD AND ACTUAL CAPITAL GAINS TAXES PAID BOARD ESTABLISHED CAPITAL GAINS TAX RESERVE 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 ACfUAL CAPITAL GAINS TAXES PAID FULL LIQUIDATING RESERVE FOR CAPITAL GAINS LIABILITY ACCRUAL $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $17,537,872.00 $16,104,320.00 $14,887,774.00 $12,548,834.00 $7,602.562.00 $13,166,255.00 $15,646,991.00 $10,961,527.00 $13,684,586.00 $13,224,672.00 $8,193,495.00 $7,160,983.00 $2,756,751.00 $3,843,489.00 $5,430,633.00 $807,345.00 $758,766.00 $758,766.00 $824,472.00 $770,554.00 $664,576.00 $443,285.00 $464,563.00 $373,709.00 $278,488.00 $189,891.00 $378,955.00 $422,000.00 $422,000.00 $422,000.00 $0 $0 $0 $0 $0 (2) The use of a full liquidating accrual methodology results in a daily NAV that is misleading. Lowering the NAV to a level that is inconsistent with the working assets of the Fund by booking a long-term liability that is contingent upon some future event that in all likelihood will not occur understates the real fair value ofFund shares. All obligations ofthe Fund that must be met are recognized and impact the NAV on a daily basis. Reducing the NAV to incorporate a liability that by its very nature is contingent upon future events, when in fact the liability can be addressed through a sound reserve policy, leads the Board to a finding that the resultant NAV would be misleading. An essential aspect of the Fund's strategy is the accumulation and retention of dividends generated by it$ portfolio of securities. The full accrual method has the potential of misleading investors by implying that dividends received are being earned at a rate which - is greater than the actual return, i.e., inflated yields because a significant portion of the principal on which the return was earned is not included in the Fund's NAV. In addition, the application ofthe full accrual method overstates expense ratios and may understate performance levels. (3) Lastly, the use ofthe full liquidating accrual methodology does_ not represent a "fair value" for the Fund's shares. -4­ • • • Copley Fund, Inc. Supplement dated November _ ___:, 2008 to Prospectus dated July 24, 2008 The Board has directed the utilization ofthe reserve value accrual method because it results in a fair value for the Fund's shares and fairly presents in all material respects the financial condition of the Fund. It also stabilizes the Fund's daily NAV because it eliminates exaggerated "swings" in NAV caused by the necessity of including a different, and often substantial, amount for liquidating tax liability on a daily basis. Details of the Board's methodology are set forth below. • When stocks appreciate in value in excess oftheir cost, an asset called unrealized appreciation is generated. The appreciation will only be realized when these securities are actually sold. However, on a daily basis, the Fund is required to mark its securities to market and thereby recognize the unrealized appreciation in the net asset value ofthe Fund. By using current values rather than cost values, the value ofthe portfolio, which makes up almost all of the total assets ofthe Fund, is reported at its actual market worth. This is an important concept in pricing the Fund at a value that truly reflects the assets held. When appreciated securities are sold, the unrecognized gain becomes recognizable and, if not offset by accumulated capital losses, will be subject to taxation. Since the unrealized appreciation and the associated taxation thereof attaches to all appreciated securities, many ofwhich will not be sold for long periods of time, the management ofthe Fund has taken the position that it will accrue a deferred income tax liability on net unrealized capital gains to the extent that management anticipates a liability may exist. This liability is based upon current market trends, accumulated capital losses, the amount of cash and cash equivalents held, and anticipated redemptions as well as the Fund's long operating history. If the Fund actually realized capital gains and paid capital gains taxes that exceeded the amount of the reserve for deferred income taxes, the net asset value ofthe Fund would be lowered by the amount ofthe taxes that exceed the reserve and shareholders would experience a real loss in value oftheir respective shares. In order to avoid this potential scenario the Fund may elect to be taxed as a regulated investment company ("RIC"), as opposed to a "C" Corporate, in the event that the actual capital gains tax liability exceeds the reserve and available tax loss carryforwards for a given period. This option would eliminate the income tax at the Fund level (35% rate) and shift it to the individual shareholder at a current 15% rate. Corresponding with an election to be treated as a regulated investment company, the Fund must make a distribution to its shareholders, of all earning accumulated as a regular corporation. This distribution would result in taxable income to the shareholders, whether or not the distribution is received in cash or additional shares of Fund stock. • Unrealized appreciation (built-in-gains) at the point in time the Fund elects regulated investment company treatment is taxable income to the Fund However, under current Revenue -5­ Copley Fund, Inc. Supplement dated November - - - - J 2008 to Pro$pectus dated July 24, 2008 • Code provisions, the FWld may elect to postpone this built-in:..gains tax until such time as the security is sold. If the security is held for at least 10 years after electing regulated investment company status, the tax will not be assessed against the Fund. Legislative or regulatory changes in, or interpretations of, applicable federal tax laws, regulations or ruling may make it impossible for the Fund to utilize certain ofthe tax management techniques and strategies described in the Prospectus. The Fund intends to evaluate continuously the operations ofthe Fund Wlder current federal tax laws as well as various alternatives available. PERFORMANCE This Section is amended by replacing the first paragraph thereof with the following and by adding the Charts and Tables set forth below: The bar charts and tables below can help in evaluating the potential risks of investing in the Fund. The bar charts show changes in the yearly performance ofthe Fund over the last ten· years. The tables compare the average annual returns for the past one-year, five-year and tenyear periods of the Fund, before and after taxes, with the average annual returns for the S&P 500 'for the same periods. Please keep in mind that the Fund's past performance (before and after taxes) is not necessarily an indication ofthe Fund's future performance. • In order to demonstrate the effects of a full accrual of deferred income taxes as compared to the reserve method, the following charts and tables are provided. The information presented in the first set of charts and graphs is based upon the inclusion in the Fund's NAV ofa full accrual of deferred income taxes that would be payable in its entirety only upon liquidation of the Fund's entire stock portfolio. 1998 2003 2004 2005 2006 2007 Fund 5.83% (6.69)% 19.75% .(2.76)% (11.93)% 18.14% 8.12% 5.S3% 14.26% 3.60"/e S&P 500 26.69% 11.55%(10.10)%(10.60)0/o (22.10)"/o 26.20% .21.26% 4.9QO/o 15.79% 5.49% 1999 Best Ouarter 13.6% 3rd-2000 2000 2001 2002 Worst Ouarter (14.95)% 3rd-2002 The performance information shown above is based on full calendar years. -6­ • • Copley Fund, Inc. Supplement dated November _ __, 2008 to Prospectus dated July 24, 2008 The inyestment return and principal value of an investment will fluctuate, so an investor's shares, when redeem~ will be worth more or less than their original cost. Average Annual Total Returns as of2.29.08 1 Year Total Return Before Taxes Total Return After Taxes on Distributions• Fund Return After Taxes on Distributions and Sale ofFund Shares* S&P 500 Index 5 Years 10 Years 3.60% 6.200/o 4.20% N/A** N/A** N/A.. 3.06% (3.60)% 5.27% 11.62% 3.51% 7.23% The information presented in the charts and tables set forth below are based upon the reserve for deferred income taxes established by the Board of Directors. • 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Fund S.36% (6.86)0,{, 26.07S% (S.72)0A.(16.81)% ·25.31% 11.77";{. 6.79".4. 16.67% 0.00"/.. S&P 500 26.69",{, 11.5S% (10.10)%(10.60)% (22.10)0,1, 26.2<>-A. 21.26% 4.90-lc. 15.79"1. S.49"A. Best Qyarter 13.6% 3rd-2000 Worst Ouarter (14.95)% 3rd-2002.. The performance information shown above is based on full calendar years. The investment return and principal value of an investment will fluctuate, so an investor's ·shares, when redeemed, will be worth more or less than their original cost. Average Annual Total Returns as of2.29.08 1 Year Totai Return Before Taxes Totai Return After Taxes on Distnbutions• Fund Return Aftec Taxes on Distributions and Sale ofFund Shares* S&P 500 Index • -7­ s Years 10 Years 0.000/o 6.900/o 5.500/o N/A** N/A** NIA** 0.00% (3.60)% 5.87% 11.62% 4.68% 7.23% ' ... Copley Fund, Inc. Supplement dated November - - - J 2008 to Prospectus dated July 24, 2008 • WHEN AND HOW NET ASSET VALUE IS CALCULATED This Section is amended by substituting the following for the second paragraph thereof: The Fund's NAVis determined by dividing the value of the Fund's securities, cash and other assets, minus all liabilities, by the number of shares outstanding. For purposes of calculating the Fund's per share price, the liability for deferred income taxes on unrealized appreciation is based upon a "reserve" for such taxes established in good faith by the Fund's Board ofDirectors. The Board of Directors believe that a "fair value" accounting ofthe Fund is best served by reporting a reserve for deferred taxes that takes into account the investment policy of the Fund, the Fund's long history o:(holding securities for many years, market conditions, anticipated redemptions and other real-time factors deemed relevant by the Board fDirectors. The Fund's securities are valued each day at their market value, which usually means the last quoted sale~ price on a security's principal exchange. Securities not traded on the valuation date and securities not listed are valued at the last quoted bid price. All other securities, including securities in which the quotations are considered to be unreliable due to significant market or other events are priced at their fair value as determined in good faith pursuant to procedures adopted by the Fund's Board ofDirectors. Part of the assets ofthe operating division consist of inventory and is valued at its fair value as determined by the Board ofDirectors. • FINAL AS TRANSMITTED TO SEC -8­ • IT~ UNITED STATES. SECURITIES AND EXCHANGE COMMISSION WA!?HINGTON, D.C. g0549 DIVISION OF' INVESTMENT MANAGEMENT .. : December 2, 2009 Roberts & Henry 164 Honeysuckle Drive Jupiter, Florida 33458 Attn: Mr. Tom Henry Re: Copley Fund. Inc. (File Nos. 2-60951 and 811-2815) Dear Sir: In your letter, addressed to Lawrence Pisto and dated October 5, 2009, you indicate that your client, the Copley Fund, Inc. (the "Company''), would like to resubmit a position on accounting for income taxes for consideration by the staff of the Division of Enforcement. You indicate that the compliance with the requirements of Statement of Financial Accounting Standards No. 109, Accountingfor Income Taxes ("SFAS 109")\ results in what you believe are misleading and inconsistent financial statements and a per share value that dos not represent the fair value for the Company's shares. Further, you indicate that the Fund has adopted the requirements of ASC 7 40, only in response to the Staffs comments. The staff of the Division of Investment Management (the "Staff') provided comments_ regarding the Company's accounting and reporting of income taxes in a letter dated September 26, 2007. Within our comment letter, the Staff detailed the basis for our comments, including our basis for determining the applicability of ASC 740 to the Company's circumstances. Your most recent letter does not provide any arguments that were not already considered by the Staff, nor does the letter cite any changes in the Company's circumstances that might cause reconsideration of our original position. As we have previously stated, we would recommend immediate enforcement action if you were to submit financial statements that did not comply with the provisions of ASC740. 1 In July 2009, the FASB released their FASB Codification, which is now the single source of authoritative non-governmental U.S. generally accepted accounting principles. The codification is effective for annual and interim periods ending after September 15,2009. SFAS 109 has been codified within Section 740 of F ASB Accounting Standards Codification ("ASC 740"). The Staff requests that y~u provide a copy of this letter to the Company's independent accountant, Amper, Politziner & Mattia, LLP (the "Accountants") upon your receipt to ensure the Accountants understand the Staff's concerns. Please note that the Staff believes that this letter should be provided to the Accountants because it constitutes a communication from a regulatory agency concerning noncompliance with or deficiencies in financial reporting practices. 2 The Staff also requests that you provide a copy ofthis letter to the Company's board ofdirectors. If you have any questions, please contact Bryan J. Morris at (202) 551-6935 or Kevin Rupert at (202)551-6966. Sincerely ~r7~ Richard F. Sennett ChiefAccountant Division of Investment Management cc: Bryan J. Morris Assistant ChiefAccountant Division of Investment Management Kevin Rupert Accountant Division of Investment Management John T. Dugan· Associate Director Divfsion of Enforcement 2 In connection with an audit of financial statements presented in accordance with GAAP, AU section 333 Management Representations requires a specific representation from management to the auditor relating to communications from regulatory agencies concerning noncompliance with or deficiencies in financial reporting practices. See also paragraph 11.26 of the AICPA Audit and Accounting Guide: Investment Companies. IT~ I· UNITED STATES SECURITIES AND EXCHANGE COMMISSION Boston Regional Office 33 Arch Street. 23rd Floor Boston. MA 02110 Phone: (617) 573-8900 Fax: (617) 573-5923 VIA FEDERAL EXPRESS March 5, 2010 Thomas C. Henry, Esq. Roberts & Henry 164 Honeysuckle Drive Jupiter, Florida 33458 . RE: In the Matter of Copley Fund, Inc .. B-233 5 Dear Mr. Henry: This investigation has been completed as to your clients Irving Levine and the Copley Fund, Inc., against whom we do not currently intend to recommend an enforcement action by the Commission. We are providing this information under the guidelines in the final paragraph of Securities Act Release No. 5310 (copy attached). As we discussed, howev~r, if the Copley Fund does not comply with the requirements of Statement of Financial Accounting Standards No. 109, Accountingfor Income Taxes ("SFAS 109") and Section 740 ofFASB Accounting Standards Codification ("ASC [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A0eae876c68d27605. Public record. Not legal advice.